segunda-feira, 29 de dezembro de 2014

It could have been staged by the Ghost of Christmas Past. The scene in the Greek parliament on Monday was just the sort of vignette that Dickens’s supernatural hero might have enacted for the betterment of the mean-spirited. Its message: behold the consequences of rigid fiscal rectitude.

The spirit of Scrooge hangs over the eurozone. More than seven years after the onset of the credit crunch, austerity prevails and the threat of deflation looms. Any cost-benefit analysis of post-crisis fiscal stringency is dispiriting. Government debt continues to rise.

As a percentage of gross domestic product, government debt rose across the eurozone from 66 per cent in 2007 to 95 per cent in 2013 — with Greece, Italy, Portugal and Ireland all well above 100 per cent. Yet policy makers remain wilfully blind to the reality that the debt problem is unresolved, and that the eurozone’s outstanding public sector borrowings will never be repaid in full.

Perhaps Greece’s snap election, now scheduled for next month, will provide the necessary wake-up call. If the radical-left Syriza party scores a victory in that poll, it could precipitate a clash with international creditors. Whether or not that happens, the only remaining question on the debt overhang is how far default will occur through inflation, and how much through formal debt restructuring.

The eurozone has, in effect, followed the Japanese model of post-bubble crisis management, a muddle-through process that has saddled the country with gross government debt equivalent to about 240 per cent of GDP.

Despite a resort to quantitative easing on an unprecedented scale by the Bank of Japan this year under Abenomics, it is proving remarkably difficult to stoke up inflation. Some on the European Central Bank’s governing council fear that a proposed move to full QE, involving the purchase of government bonds, would be equally ineffective in imparting stimulus to the eurozone economy.

A reversion to 1970s-style inflation seems unlikely in the immediate future — not least because the present decade looks, in economic terms, like an upside-down version of those days. Back then inflation expectations were low, trade union power was strong, and the share of national income taken by labour was high, while energy and commodity prices were soaring.

Today bond markets are vigilant about inflation, the share of labour in national income is declining, and energy and commodity prices are plunging. At the same time the profit share has risen to record levels and inequality is, rightly, the bugbear du jour.

Low inflation is not cyclical. There are long-term structural issues, notably the decline of the bargaining power of labour, that depress both demand and inflation. This is because workers tend to consume more of their income than the rich. And central bank bond-buying is no panacea: the main effect is simply to raise asset prices, which benefits the rich. An uneven distribution of income and wealth thus makes it harder to galvanise the real economy.

Economists at the Bank for International Settlements, the central bankers’ bank, add that policy has exacerbated the problem because it has failed to lean against booms, and has eased aggressively during busts, inducing a downward bias in interest rates and an upward bias in debt levels. That, in turn, makes it harder to raise interest rates without damaging the economy, thereby creating a debt trap.

If that is where we are now, the logical way forward is debt forgiveness. Yet a moralistic perception of creditors as inherently virtuous and debtors as profligate sinners stands in the way (no matter that such “profligates” as Spain and Ireland entered the crisis with government debt way below the German level). So, too, does a selective German historical memory.

The paradox of the German view on debt is that Germany has been the biggest developed world beneficiary of debt forgiveness in recent memory. In the postwar London Debt Agreement, German external debt was substantially written off or deferred. The West German economic miracle was thus launched from a clean balance sheet while the Allies remained heavily indebted.

Just as Germans are obsessed with the consequences of the Weimar inflation but put less emphasis on the unemployment that brought Hitler to power, many cite the Marshall Plan as an act of American generosity, while the Allies’ larger act of macroeconomic mercy on debt has disappeared from political consciousness.

One result of all this is the rise of extremist anti-immigrant parties such as the French National Front and the Sweden Democrats, along with opponents of German-inspired austerity such as Syriza in Greece. The political consequences of a rise in extremism resulting from the moralistic German view of debt could be profoundly disturbing.

quarta-feira, 24 de dezembro de 2014

So it is Christmas. And, as every year, people will spend time with relatives they do not much like, give presents that the recipients value at less than they cost, and eat and drink more than they know is good for them. As new year approaches, they will make resolutions not to do these utility reducing things again, resolutions which they will not keep.

Confronted with this evident irrationality, economists conclude that if only more people had taken Economics 101 the world would be a better, happier or at least more prosperous place.

Still we persist in these customs. It is easy to understand why, as the season of forced goodwill approaches, we economists are reflecting on the inadequacies of theoretical models of rational behaviour. But those who applaud our criticisms of these models are, perhaps, too quick to cheer. Economic behaviour may often be irrational — in the decidedly specialist sense in which economists use the term — but it is usually adaptive, and that is often much the same thing as rationality.

Historical scholarship suggests it is unlikely that Jesus was born on December 25, or at any time in the Palestine winter. The festival that the secular world celebrates — even the markets close and the Financial Times refrains from publication on that day — was, it seems, originally pagan. But it was appropriated by shrewd salesmenfor the religion of Christianity, who appreciated that a good knees-up would help attract adherents to their cause. Their Christian event has more recently been hijacked by commercial interests that rely on a December rush to empty their shelves.

Such processes of adaptation are the means by which economies and institutions change over time. They are rarely the outcome of careful calculation but they are far from irrational in their origins or their consequences. Evolution can bring about outcomes more complex and sophisticated than any designer could achieve. That is what makes evolution one of the most powerful, and paradoxical, of human ideas.

But successful adaptation looks very like rational decision making. The cynical evangelists who adapted the winter solstice to their Christian purposes, and the mercenary traders who use the nativity to attract us to their stores,may seem to fit the caricature of the rational economic human. Did not Richard Dawkins explain evolution with the metaphor of the “selfish gene”? And, if the selfish gene populates the earth, will not the selfish trader dominate the economy?

No. The selfish gene is not literally selfish — and if it were it would actually be less successful in propagating itself because it does not sufficiently know what its best interests are. Lehman Brothers and Bear Stearns — the latter the broker-dealer whose mission was to “make nothing but money” — failed in the long run because the ethos of making “nothing but money” was not conducive to creating a sustainable organisation. Only profitable companies can survive; but it does not follow, and is not in fact true, that the ones that survive are those most oriented to making profits. Scrooge is not a happy individual because he does not, until his epiphany, understand that happiness lies not in selfish behaviour but in interaction with others. The happiest people are not necessarily those most determined in their pursuit of personal happiness.

Our cousins and parents-in-law may not be people with whom we would naturally have chosen to spend time. But the effectiveness of family bonds in supporting us in childhood, old age and other moments of dependency has ensured that the maintenance of these bonds through ritual occasions is part of every culture. Gift exchange is a means of establishing and reaffirming social obligation and reciprocity, and is similarly universally practised. Our judgment of what the recipient will value is a means of demonstrating intimacy (or failing to do so). Those who discern irrationality in such behaviour display only the limits of their own conception of rationality.

And why do we eat too much, and break our new year resolutions? Because we do not have the consistent preferences that a narrow conception of rationality requires. We want to eat well, and also to be thin — and the preferences wired into our brains when food was scarce are not necessarily appropriate when food is only a call to the pizza delivery service away. We want to be naughty, and also for Santa to bring us lovely presents — and experience shows that usually he will.

Evolution is smarter than you, and smarter than rational economic man.

terça-feira, 23 de dezembro de 2014

On top of his Ukrainian tribulations Vladimir Putin now has to manage a war of attrition with currency speculators. Lack of confidence in the Russian economy has prompted a flight in capital as some investors seek to limit their losses on rouble assets while others actively bet on a continued depreciation of the currency. The president’s battlefield options range from strategic retreat (allowing depreciation) to raising interest rates and selling foreign exchange to imposing controls on capital outflows.

The first three options are close to being exhausted. The rouble has already depreciated by more than seems warranted even by a pessimistic view of Russia’s economic fundamentals. Last week the Central Bank of Russia increased interest rates to 17 per cent, a level where further increases are likely to be self-defeating because of the economic costs they would impose. Finally, Mr Putin indicated in his press conference on Thursday that the country’s international reserves, while still at a comfortable level, should no longer be wasted in market interventions to prop up the national currency.

This leaves capital controls. Would they work for Russia? What can we learn from international experience of the use of capital controls in currency crises?

The economics of capital controls on outflows are relatively straightforward. Controls impose a cost on investors for removing capital from the domestic economy — a cost the authorities no longer have to pay in the form of, say, an excessively depreciated exchange rate. So they open some breathing space for the authorities to put in place policies to revitalise the domestic economy or at least limit the damage. In particular, they allow monetary authorities to reduce interest rates as capital controls take up some of the burden of defending the currency.

But capital controls also leave room for policy inaction or bad policies. Either way, the respite offered by controls decreases over time as investors learn to circumvent them. This is especially true in Russia, where previous attempts to stem capital flight (for example, after the 1998 financial crisis) have quickly beencircumvented with great ingenuity. It is crucial that the authorities use the limited breathing space offered by such measures to establish a credible policy path that makes investors willing to come back and stay in.

An often cited example of a successful use of controls is Malaysia in 1998. In 1998 market participants were alarmed by the anti-market rhetoric and unorthodox economic views of Mahathir Mohamad, then prime minister. The authorities banned offshore trading and repatriation of investments held by foreigners. Meanwhile all ringgit assets held abroad had to be repatriated.

These measures were sweeping, and effective in choking off speculation against the currency. But they were also temporary. The controls were gradually relaxed as the economy improved, allowing the country to return to the international bond market in 1999. It was clear to the authorities and to market participants that Malaysia, given its dependence on foreign direct and equity investment, would have much to lose from turning its back on international financial integration.

There is also evidence that controls on capital outflows are often ineffective. A recent International Monetary Fund study looking at the effectiveness of capital outflow restrictions in 37 emerging economies finds that, more often than not, controls failed to stem net capital outflows because they were not accompanied by credible policy adjustments. Furthermore, in some cases they have taken on a more permanent character and marked a shift to policy regimes with high inflation and chronic capital flight. Argentina since 2002 and Venezuela since 2003 are examples of this.

So where would Russia fit in the spectrum stretching from Malaysia to Venezuela? The main lesson from international experience is that controls on capital outflows can work — but only if they are associated with a credible policy plan addressing the underlying cause of the confidence crisis.

In the case of Russia the plan needs two components, both related to the biggest problems facing the economy. The first is a clear plan for adjusting to a prolonged period of low oil prices; and the second is actions that will allow western powers to lift the economic sanctions imposed following Russia’s intervention in Ukraine.

Both, it should be noted, are of course desirable — whether or not capital controls are introduced.

Olivier Jeanne is professor of economics at Johns Hopkins University and non-resident senior fellow at the Peterson Institute for International Economics

segunda-feira, 22 de dezembro de 2014

To some people, the future will always be behind them. Rarely, however, has such gloom covered most of the western world at the same time. Even during those brief moments — the stagflation of the 1970s, for example — it faded with the crisis.

Today’s pessimism is more troubling in two ways. First, economics does not fully explain it. In the US, which is in its fifth year of recovery, the share of those who think their children will be worse off is the same as stagnant Italy. The trend predates the 2008 meltdown. Second, the rise of miserabilism coincides with the west’s latest technological revolution. Rarely has personal freedom, the west’s creed, been less stoppable. Yet our gloom appears to deepen. Is the west losing its grip on reality?

It would be tempting to say yes. The average westerner lives far longer, is far less affected by war and has vastly greater choice than any people in human history. To be alive and free ought to be a giddy privilege. Perhaps we are so historically ignorant in our bliss that we do not appreciate what we have. Maybe something deeper, the continuous distraction of technology, perhaps, has so altered our neural wiring that we are less capable of appreciating what is under our noses. Or perhaps we are so unimpressed with the quality of public life nowadays, we suffer that misery that can come only from self-knowledge. All are types of depression. Each, in one form or another, has been suggested as an explanation for the west’s gloom. None strikes me as a killer diagnosis.

A more plausible theory is to blame our angst on the rise of others. Among the many surveys of global attitudes, it is striking how consistently more optimistic Asians, Latin Americans and Africans feel than people in the west. It makes sense that people in China, India and elsewhere feel rosier about their children’s future. How could it be otherwise? Most people in the developing world start from such a low base that only catastrophe could prevent the rise of living standards. But it would be a stretch to blame western pessimism on that. A more global economy ought to be a net benefit to everyone. It should also be flattering. Today’s world is rising very much in the west’s image. Russian President Vladimir Putin and China’s communists notwithstanding, there is no ideological rival to democratic capitalism. Even Cuba is belatedly tiptoeing in from the cold.

What then, is the matter with the west? The answer is beguilingly simple. We are growing older. In economic terms that means secular stagnation. Japan is greying faster than the rest — its economic growth has also been slower for longer than that of any other wealthy country. But it is a matter of degree. The greyer we become, the less we save. The less we save, the less we invest. The less we invest the slower we grow. Modern technology ought to provide the answer, we are living longer so we should be working longer. However, politics stands in the way.

The less we grow, the more we squabble over budgets. From Spain to Canada, the old keep getting the better of the fiscal wars. France has a higher birth rate than most other European countries. But it devotes more than average of its resources to the old. One of the reasons François Hollande was elected president was that he pledged to restore the French retirement age to 60 from 62. In the UK George Osborne, chancellor of the exchequer, has exempted state pensions altogether from the spending cap on welfare. In the US, Medicare and Social Security gobble up a larger share of the federal budget each year. No party dares touch the retirement age — which is set to rise only at a glacial rate from the current level of 65.

The better the “grey lobby” does, the more it shortchanges our future. That, in turn, creates a backlash against politics as usual. In practice, that means blaming immigrants. One of the key drivers of the Tea Party, the National Front in France and the UK Independence party is their tendency to look for scapegoats. None is likely to take direct power. But they act as a block on those who can redress the declining worker-pensioner ratio. A crucial part of the remedy is to boost immigration. Stopping that from happening is a core aim of the anti-politics backlash. This, too, is a price of western gerontocracy.

There are other costs besides fiscal. Alfred Sauvy, the French thinker who invented the term “third world”, feared the west would turn into a “a society of old people, living in old houses, ruminating about old ideas”. There may be something to that. Nice though it is to watch the Rolling Stones perform, one cannot help noticing their creative days are over. But their cohort – the baby boomers – are still getting what they want. In Mick Jagger’s heyday, that meant rebelling against old mores. Today that means protecting retirement nests.

Of course, not every pensioner is well off — rising inequality affects all age groups. But as a block the baby boomers have been winning since they were born. They look like keeping that record until they die. The generations after them may not be so lucky. Polls show that the old are as worried about the future as any other age group. Perhaps this comes tinged with guilt. There is no mental disorder here. If the west as a whole thinks its best days are over, it must be related to the fact that for so many it is literally true.

sexta-feira, 19 de dezembro de 2014

When trying to understand how the market is working, we should think not only of bulls and bears, but also of dodos. Our aversion to risk comes from the deep biological imperatives that have allowed humans to avoid extinction. Any theory of markets must take account of this.

That, at least, is the radical prognosis of Andrew Lo, of the MIT Sloan school of business, who has for years worked on an ambitious project to apply biology to finance. His latest paper, published with several colleagues, provides mathematical equations to show how risk-averse behaviour is necessary for survival. That means that investors in markets will take risk-averse actions rather than the purely rational decisions that economists have classically assumed.

If we are indeed hard-wired for risk-aversion in a mathematically clear-cut way, then we can explain why it is prevalent in many markets and we can incorporate this into models. But it is of more than academic interest.“Risk-aversion is one of those behaviours that may not seem all that rational in terms of building wealth, or increasing the number of offspring,” he says. “But . . . if you engage in more conservative behaviour, it’s much less likely that nature will eliminate you.”

It also shows that behaviour responds to changes in the environment, which is far more important than individual preferences. Dodos, for example, evolved in a comfortable island environment with no predators into large flightless birds who laid one egg at a time. Once their idyll ended, and humans and other predators arrived, they were extinct within a century.

Creatures that had adopted a more diversified strategy to reproduction could have avoided extinction. As Mr Lo puts it, “nature abhors an undiversified bet”. Surviving species, like humans, exhibit far more diverse and risk-averse behaviour than dodos. “When an environment is stable for a long time, we adapt to it. But if the environment shifts, that learnt behaviour can suddenly become very counterproductive.”

In the same way, external shocks to market environments cause long-running and deep-seated changes in investors’ behaviour. The theory explains why markets move in long secular phases. For an analogy, look at investor behaviour in 1999, a time that is under scrutiny as the US stock market approaches new highs under the guidance of a benevolent Federal Reserve. That came in an environment that had long been favourable to stocks, with gently falling bond yields and a strong economy, for almost two decades.

In the late 1990s, as now, the stock market suffered a succession of sharp corrections, usually driven by external events such as the 1997 Asia crisis, or the 1998 Russian default. Each time, investors treated the correction as a buying opportunity, and the market soon moved on to greater highs – until it finally reached unsustainable levels in early 2000, and crashed.

“Over that period, the only lesson that investors learnt was to buy on the dips, and over time that created a false sense of security. It lulled us into a period of low risk-aversion. “ says Mr Lo. The “wisdom of crowds” had been replaced by the “madness of mobs”.

After the crisis that behaviour shifted swiftly to great risk-aversion.

But what of the situation now? The similarities to the party of 1999 are growing uncomfortable. In the past two weeks, US stocks staged a dramatic about-turn as worries about growth, and a currency crisis in Russia, caused many to reassess their optimism.

Then, on Wednesday, Fed chairwoman Janet Yellen gave her quarterly press conference, and made clear that the US central bank would be “patient” in returning interest rates to normal. The result was a switchback. By mid-session on Friday, the S&P 500 was close to its all-time high once more, and the dollar was back at a new high for the year on a trade-weighted basis.

This looks suspiciously like learnt behaviour that has adapted to a benign environment. The Fed speaks in code, to keep its options open, but on this occasion it was perfectly possible to view Ms Yellen’s comments as a warning of higher rates to come. By saying only that rates would not be rising for the next “couple of meetings”, she alerted the market that rate rises could come as early as next April. It is plainly the Fed’s intention to raise rates next year unless conditions change. Even if it wants to nudge markets gently, to avoid the risk of another crash, that is the direction in which investors need to be nudged.

After years of monetary forbearance, it is not surprising that investors seized on the parts of her message that suggested the Fed would make their lives easy once again. That is the message they have learnt for almost two decade.

But that behaviour is worryingly reminiscent of the party of 1999 – and of the dodo.

quinta-feira, 18 de dezembro de 2014

It is that time of year. What single word, an old friend challenged, best describes the forces that have been shaping the world. If I am allowed only one choice it has to be “fragmentation”. Were I permitted a second, it would be “identity”.

The splintering of the old order is at its most stark — and brutal — in the Middle East. In Iraq, Syria and Libya the state has all but collapsed. Whatever one thinks of Mark Sykes and François Georges-Picot, the map they drew almost a century ago no longer describes the territorial reality. These states will probably never properly be rebuilt.

The fragmentation dynamic reaches well beyond the murderous sectarian conflicts engulfing the Arab world. The founding assumption of the post cold war settlement was that global economic integration would drive closer political cohesion. In today’s post, post cold war order, economic and political nationalism are marching together in the opposite direction.

The frontiers of globalisation are being rolled back. Remember the Washington consensus? The crash of 2008 read the rites over what was to have been a seamless melding of the world’s capital markets. Banking has been renationalised as governments repudiate responsibility for anyone else’s debts.

The internet faces the same process of Balkanisation. For good reasons and bad, states have decided that the digital age cannot be left in the charge of the corporate behemoths of Silicon Valley.

Trade multilateralism has been replaced by bilateral dealmaking and regional pacts. There is a symmetry here. China, India and the rising rest are jealous guardians of their national sovereignty. A world-weary — and wary — US no longer has the capacity for, or self-interest in, writing and enforcing universal rules. Beijing views the Bretton Woods institutions as emblems of passing western hegemony. Washington refuses to stump up its dues for the International Monetary Fund.

Vladimir Putin has delivered the most abrupt shock to those 1990s assumptions about values and interests being shared across state borders. By annexing Crimea and sending his little green men into eastern Ukraine, the Russian president tore through the fabric of the postwar European settlement.

Mr Putin is paying a heavy price as western sanctions amplify the impact on the Russian economy of the sliding oil price, but, even so, you do not hear much talk nowadays about a Europe whole and free.

The response of the EU to such aggression has been, well, fragmented — an unseemly struggle between those, including, thankfully, Germany’s Angela Merkel, who think international rules are worth defending and those — stand up Italy’s Matteo Renzi — who assert the primacy of national economic self-interest.

Solidarity is not the EU’s strongest suit these days. The long march towards political and economic integration that began with Franco-German reconciliation has stalled. Leaders across the continent are running scared of populists such as Marine Le Pen’s National Front in France and Nigel Farage’s UK Independence party. Brussels has been cast by the xenophobes as the agent of uncontrolled immigration and untrammelled capitalism.

The logic of the single currency, as Mario Draghi, European Central Bank president, never tires of saying, demands that governments pool economic decision-making. In spite of the near collapse of the entire enterprise, the pull of national prerogatives and preferences has proved too strong. The euro is left stranded in the no-mans land between systemic cohesion and potential disintegration.

Much of this speaks to an effort by states to recover the levers of power lost to globalisation. Under pressure from disenchanted electorates, governments want to call more of the shots — though none will admit that it is too late now to unravel the tightly bound threads of economic interdependence.

The more dangerous dynamic is the visceral nationalism evident in Mr Putin’s claim to be protector of all Russian-speakers from the former Soviet Union, in China’s assertive pursuit of its territorial claims in the western Pacific, in the xenophobia of would-be political strongmen such as Hungary’s Viktor Orban, and in a resurgence almost everywhere — and here I come to my second word — of the politics of identity.

Identity is often deployed as a powerful instrument of state power. But, save in singularly homogenous communities, it can also serve as the catalyst for fragmentation. At its most extreme this sees national allegiances abandoned to primordial loyalties to clans, tribes or religion. Shia, Sunnis and Kurds are carving out their own territory. The terrorists of the self-styled Islamic State are offering Muslims everywhere an alternative identity.

At the other end of the spectrum, a narrowing of identities drives constitutional separatist movements such as those of the Catalan and Scottish nationalists. Somewhere there is a line between legitimate self-determination and destructive fragmentation; the problem is that no one is quite sure just where to draw it.

It always strikes me when I visit Beijing that Xi Jinping’s much vaunted “China dream” throws a cloak over deeply felt fear of the separatist movements in Xinjiang and Tibet. Mr Putin’s Slav nationalism sits ill alongside the Islamist insurgencies in much of the Caucasus.

So there you have it, albeit in two words rather than one. Fragmentation and identity serve as mirror images in a world that seems to be looking for reasons to splinter. It is not a cheering prospect. The one thing we can say with certainty about this new international disorder is that it will not be stable. Happy Christmas.

quarta-feira, 17 de dezembro de 2014

Who will win last week’s Japanese election? The question seems foolish, not to mention grammatically confused.

Shinzo Abe’s gamble to hold a snap election paid off brilliantly. The opposition was caught off guard and, against all the odds in the midst of a recession, the ruling coalition maintained its two-thirds “supermajority” in the lower house. What’s more, the prime minister has seen off an embryonic rebellion from his own party hacks angered that they were overlooked in a cabinet reshuffle in which five women were appointed. He has shown them who is boss. He will now sail through next year’s Liberal Democratic party leadership election. Nothing will then prevent him staying in office until late 2018, making him Japan’s longest-serving prime minister in half a century. On this reckoning, he is the big winner. Yet, as with many things in Japan, probe a little deeper and not everything is as it seems.

First, Mr Abe’s LDP actually lost seats, albeit only four. The turnout, at 52 per cent, was the lowest of the postwar period. Many of those who stayed at home would have voted against Mr Abe — had there been anyone to vote for. The Democratic Party of Japan, the official opposition, is in such disarray that it failed to field candidates in several districts. In spite of its shortcomings, it still managed to scramble 11 more seats.

The big winners turned out to be the pacifist Komeito party, the LDP’s coalition partner; and the Communist party, which more than doubled the number of seats it holds to 21. That will allow it to introduce legislation into the Diet, most of which will presumably not be to the conservative Mr Abe’s liking. Compulsory singing of “The Internationale” on the Diet floor, perhaps? In terms of the security policies that are dearest to Mr Abe’s heart, the seats gained by Komeito, a party with a strong Buddhist support base, are just as worrying. The Buddha is not on record as supporting a rewrite of Japan’s pacifist constitution.

Mr Abe will now almost certainly have to abandon that ambition. Not only does Komeito have more leverage in the coalition. The small rightwing parties that support a more robust security stance were wiped out. Michael Cucek, a long-time political observer, argues credibly in his blog that the prime minister’s rightwing agenda has been stopped in its tracks, and Mr Abe will be able to do no more than pay lip service to his revisionist agenda. Mr Cucek’s post is provocatively titled: “How Prime Minister Abe Lost on Sunday.”

That may be over-egging it. More than foreign policy issues, Mr Abe’s fate rests on the economy. Here the reverse of the above arguments may be true: things may be better than they appear. On the surface, Japan’s economy is not in great shape. It was knocked sideways by a rise in consumption tax in April. That led to two quarters of contraction and — if recent data are to be believed — only the mildest of recoveries.

This may already be old news. In the next 18 months, the economy could be in for a strong run. The threat of another consumption tax rise is over, at least until 2017. The yen has become super-competitive, thanks to another round of quantitative easing that takes the currency’s devaluation against the dollar to about 45 per cent in two years. After years in which companies have invested in plant abroad, there is a real prospect of reshoring. Furukawa Electric, and industrial groups Toray and Daikin, are all building factories in Japan. Rumours are that Toyota could be next.

Those companies that do not bring jobs back will at least bring higher profits denominated in a weaker yen. Last year, unions pressed for a 1 per cent pay rise and secured 0.8 per cent. This year, according to Jesper Koll of JPMorgan in Tokyo, they will press for 2 per cent — and probably succeed. Wages in the large casualised part of the workforce are already rising 6 per cent a year. The labour market is tight, with more jobs on offer than applicants. Every December, the post office offers temporary jobs to cope with the trillion-plus new year greetings cards sent. Two years ago, it was offering Y970 an hour, which rose to Y1,080 last year. This year, the hourly rate is Y1,450.

Prices are edging in the opposite direction. That is largely because “cost-push” inflation, resulting from higher imported oil prices, is petering out as oil prices plummet. If wages do rise, people will start to feel better off and spend more. If so, cost-push inflation could slowly give way to demand-led inflation — precisely what Mr Abe wants.

Of course, this is a bit of a fairytale scenario. If it contains even a smidgen of truth, however, Mr Abe will be the winner of Sunday’s election after all.

terça-feira, 16 de dezembro de 2014

Russia lurched towards a financial crisis evoking parallels with its 1998 crash, as the rouble plunged more than 11 per cent on Tuesday despite a dramatic midnight interest rate rise by the country’s central bank.

The rouble turmoil showed signs of spreading to global markets, as investors piled into haven assets and German bond yields dropped to a record low.

“Russia is in full-blown currency crisis,” said Alexander Moseley, fund manager at Schroders. “It is difficult to see the underlying source of stress ending”.In a sign of the pressure policy makers are under, Sergey Shvetsov, deputy governor of the central bank, said the situation was “critical”: “I couldn’t imagine even a year ago that such a thing would happen — even in my worst nightmares,” he said at an event in Moscow.

At one point on Tuesday the rouble tumbled to Rbs80 against the US dollar before recovering to Rbs70. It has fallen more than 50 per cent since the start of the year, reviving memories of the 1998 crash when Russia defaulted on its domestic debt - though its public finances and reserves are in a much healthier state than they were 16 years ago.

The currency’s rout comes in the run up to Fed chairwoman Janet Yellen’s last monetary policy meeting of 2014. If she sends a strong signal on rate rises next year it could extend a rout in emerging markets by sucking capital back into the US.

The rouble’s slide has been driven by declining confidence in the central bank, western sanctions over Russia’s intervention in Ukraine, and a plunging oil price, that on Tuesday dipped below $60 for the first time since July 2009.

As the currency continued to slide, prime minister Dmitry Medvedev summoned senior central bank and government officials for urgent talks on the country’s financial and economic situation.

Investors and Russian citizens are now looking to an annual press conference by Mr Putin for signals on how he plans to deal with the crisis — and in particular for any signs that he may soften his stance on Ukraine in an attempt to ease sanctions.

The failure of Russia’s central bank to stem the currency’s sharp declines with an emergency interest rate rise of 6.5 points to 17 per cent raised speculation that Moscow could introduce capital controls.

“It cannot get much worse for Russia. The final step for the perfect storm would be the introduction of capital controls,” said Heinz Rüttimann, emerging market strategist at Julius Baer.

“Investors are pricing in that Russia is going to experience quite a nasty recession, which will feed through to other countries,” said Andrew Milligan, head of global strategy at Standard Life Investments. “There are understandable worries in what are fast becoming very illiquid markets ahead of Christmas.”The rouble’s fall ricocheted through global financial markets, encouraging a flight to quality among investors. Yields on 10-year debt issued by Germany dropped to 0.56 per cent for the first time, while equivalent Japanese bond yields hit a record low of 0.36 per cent.

Moscow’s MICEX stock index fell by more than 8 per cent during the day before recovering, with shares in Russia’s biggest bank, Sberbank, down by 17 per cent and Gazprom down 10 per cent.

Some Russian bank branches were left short of foreign currency as ordinary citizens rushed to convert money from roubles to dollars and euros — in a move that bankers and trades say has been a major driver of the Russian currency’s plunge. One Sberbank branch on Tsvetnoi Bulvar in central Moscow had only $100 left in cash by 7pm on Tuesday, a cashier told the FT, after starting the day with $100,000.

Standing in a queue of a dozen people at another branch of Russia’s largest bank, Galina, a retiree, explained that she was waiting to change her pension into dollars. “None of us know what’s happening. We’re all worried that the currency will keep falling,” she said.

Analysts said the central bank’s hefty interest rate rise was a textbook response to the crisis, but may have been too late.

Lars Christensen, chief analyst at Danske Bank, said that as long as oil prices continued to drop the central bank would have a “hard time” stabilising the rouble. He added that the rate rise marked the central bank’s “first major change of course” from its recent strategy of letting the rouble float freely.

Russia’s benchmark 10-year yields increased by more than 2 percentage points to 15.36 per cent, the highest since 2007, while its dollar-denominated equivalent gained 36 basis points to 7.55 per cent.

While years of prudent fiscal policy and a war chest of $400bn in foreign exchange reserves have helped Russia fend off an outright financial crisis, the rouble rout has greatly increased the burden of more than $600bn in external debt held by banks and companies. Little of this debt can be refinanced because western sanctions have largely locked Russian borrowers out of US and European capital markets.

Oleg Kouzmin, economist for Russia and CIS at Renaissance Capital in Moscow, said the rouble weakness “puts the domestic financial markets under heavy pressure, including the domestic banking sector”. He said the central bank’s drastic interest rate rise was likely to be followed by massive direct interventions.

“On our rough estimates, if the CBR sells around $20bn of dollar liquidity in the remainder of the month and [the] oil price stays stable, the rouble might be able to appreciate by 10 to 15 per cent compared to current levels,” he said.

segunda-feira, 15 de dezembro de 2014

Russia’s Central Bank has raised its main interest rate from 10.5 per cent to 17 per cent in the middle of the Moscow night, just five days after the last rate rise and hours after the rouble suffered its worst drop since 1998.

“The decision was driven by the need to limit the risks of dealecvaluation and inflation, which have recently significantly increased,” the central bank said in a statement.Its move followed a day during which the rouble had tumbled more than 10 per cent against the dollar as the implications of the fall in oil prices for the country’s energy-dependent economy triggered a rout across Russian markets.

In the bleakest official forecast yet from Moscow, the Russian central bank warned that the country could see a 4.5 per cent to 4.7 per cent contraction in GDP next year if oil prices remained at $60 a barrel.

Along with the rate rise the bank also announced it would expand its foreign currency repo auctions from $1.5bn to $5bn, in an attempt to provide liquidity to the country’s banks, which have been struggling with a shortage of dollars.

Currency traders and analysts in New York described the central bank’s move as a “last-ditch” effort to stop the rouble’s relentless slide.

“It’s a shock-and-awe approach that has worked in the past with other emerging markets’ central banks, trying to defend their currency and shake short-term speculators out of markets,” said Kathy Lien of BK Asset Management, which specialises in currencies.

“Basically the Russian central bank is telling markets that it is on the other side of this trade and won’t let the rouble completely collapse. They have tried a lot of measures recently and none seemed to have worked. The rate rise should, at least in the short term, help the rouble find a bottom,” she said.

Aggressive rate rises are not uncommon in emerging markets when central banks have to defend their currencies from rapid depreciation. Earlier this year Turkey pushed up its key interest rate from 7.75 per cent to 12 per cent on overnight loans. Brazil’s raised its prime-lending rate to 45 per cent in March 1999 after the real weakened by 40 per cent.

The combination of a sharp drop in the price of oil, western sanctions and paralysing uncertainty over the economic outlook have triggered a collapse in the rouble in the past month. It hit fresh lows of 64.45 against the dollar and 81.35 to the euro on Monday.

So far this year, it has lost half its value against the dollar, making it the world’s worst-performing major currency, ahead of the Ukrainian hryvnia.

Traders said the central bank had intervened several times during Monday trading but had failed to halt the slide in the rouble for more than a few minutes on each occasion.

“There is panic in local markets driven by the inaction of the central bank,” said Benoit Anne, head of emerging markets at Société Générale, earlier in the day. “Russia may not be on the brink of financial crisis but it is close to losing its investment-grade status.”

The sell-off swept across asset classes, with the shares of Sberbank, Russia’s largest bank, dropping 6.3 per cent, and Rosneft, the state oil company, falling 4.4 per cent. In dollar terms, Russia’s Micex equity benchmark has fallen more than 26 per cent so far in December — on track to be the biggest monthly drop since October 2008.

In bond markets, the yield of the government’s international dollar-denominated bond leapt up more than half a percentage point to 7.22 per cent — above the equivalent yields for Rwanda, the Ivory Coast and Peru.

Dubbing it “Red Monday”, Timothy Ash, emerging markets strategist at Standard Bank in London, said the rout was a demonstration of investors’ lack of confidence in the Russian economy. “It is not just about oil, it is about sanctions, geopolitical risk and . . . the lack of policy action by the Russian authorities,” he said.

In Moscow, the currency collapse evoked memories of the economic turmoil of the 1990s, as a few Russian shopkeepers gave up trying to keep pace with the falls in the rouble and returned to the practice of marking prices in “conditional units” — a code for dollars.

The central bank on Monday forecast that capital outflow from Russia would total $120bn in 2015, nearly matching the $134bn estimated to leave the country this year. It also predicted outflows of $75bn in 2016 and $55bn in 2017.They were swiftly brought into line. Alexei Nemeryuk, head of trade and services at the Moscow mayor’s office, told news agency Interfax on Monday that marking prices in anything other than roubles was illegal. “Apparently, retailers are too lazy to rewrite their price tags. But this is a few isolated cases,” he said.

Russian companies remain largely shut out of global capital markets as a result of sanctions imposed by western countries and face a looming credit crunch as they need to refinance their debt. Rosneft, for example, last week raised Rbs625bn from local banks ahead of a foreign bond payment due at the end of the week.

Data from JPMorgan shows that, on average, Russia’s hard-currency corporate bond yields have increased from 8 per cent at the start of the month to about 11 per cent.

“The situation in Ukraine and resulting sanctions have led investors to question how exactly Russian corporates will be able to refinance their debts without access to their usual investor base,” said Yannik Zufferey, head of the Swiss fixed-income team at Lombard Odier Investment Managers.

sexta-feira, 12 de dezembro de 2014

Whatever was on the minds of investors who dumped Greek stocks and bonds this week, reigniting fears about the eurozone’s stability, it was almost certainly not the hunger strike of a 21-year-old self-styled anarchist imprisoned for armed robbery.

Yet what dominated the nation’s television news was not the market rout and its immediate cause — anxiety that the radical left might come to power thanks to the surprise decision of Prime Minister Antonis Samaras, to call a snap presidential election. Rather, the top news item was the deal cooked up by politicians to end the hunger strike of Nikos Romanos by letting him attend university lectures, albeit tagged with an electronic bracelet.

Beyond the intriguing fact that Romanos is a convicted bank robber who wants to study business administration, there is a closer connection than meets the eye between his prison protest and the market turmoil. The aspiring student, who still faces charges of belonging to a terrorist organisation, serves for many Greeks as a symbol of their suffering country, hungry and desperate after almost five years of what they see as increasingly pointless servitude to cruel foreign creditors.

Others take a more jaundiced view of Romanos. They regard him as a privileged middle-class radical, a young man whose comfortable upbringing, anti-establishment politics and handsome features make him curiously similar to Alexis Tsipras, the 40-year-old leader of Syriza, the leftwing party that is the bête noire of foreign investors and European governments.

A political career may yet await Romanos after his prison term and business studies. But what bothers Greece’s eurozone partners is whether Mr Tsipras will replace Mr Samaras as prime minister — and, if so, whether he will outrage them by behaving like Leon Trotsky, the Bolshevik who insisted on repudiating tsarist Russia’s foreign debt; or mollify them by emulating François Hollande, the French president whose government is shedding its socialist shibboleths like autumn leaves.

The presidential election gives Mr Tsipras a sniff at power. Mr Samaras’s coalition government will struggle to cobble together the three-fifths parliamentary majority required to elect the prime minister’s candidate, Stavros Dimas, a former EU commissioner. If the gamble fails, Greece will hold a general election — and Syriza holds a consistent lead of 4 to 7 percentage points in opinion polls over New Democracy, Mr Samaras’s Conservative party.

Superficially, this seems a scenario rife with danger — and that is why the Athens stock market on Tuesday suffered its biggest one-day fall since 1987. After all, Mr Tsipras stands for a drastic rescheduling of foreign debt, a politically explosive step for the nation’s European creditors. It would expose as nonsense the solemn reassurances given to German and other voters that Greece will one day fully repay its multibillion-euro loans. Solidarity in the eurozone might be strained to the limit.

Yet in certain respects Mr Tsipras is advocating only what a number of perfectly level-headed foreign economists advocate, too. It beggars belief that Athens will ever repay all its debts. In any case, its creditors have already stretched the maturity of their loans far into the future and have significantly lowered the interest payable. A partial debt write-off might help attract foreign investment, by enabling Greece to borrow on more favourable terms, and might breathe life into private sector businesses.

Arguably, the truly foolish element of Syriza’s programme is its determination to ramp up public expenditure and dilute the creditors’ attempts to make the state efficient for the first time in 182 years of independence. These policies make Mr Tsipras look less like a wild-eyed extremist — though he was a communist in his youth — than a 21st-century version of Andreas Papandreou, the late socialist premier who built the patronage political system that put Greece on the path to perdition.

The chances are slim that Syriza, even in office, will ever be strong enough to implement its policies in full. In the first place, its electoral support seems too limited to win it an outright parliamentary majority. In a coalition, it would have to make compromises.

More to the point, Greece’s international standing is weak and any future government would have to negotiate with its creditors. The US, though critical of Germany’s handling of the eurozone crisis, would never align itself with a dysfunctional minnow such as Greece at the expense of Berlin, Europe’s weightiest power. Russia, though close to Greece in its Orthodox religion, is in the west’s bad books because of its intervention in Ukraine, and it would be rash for Athens to place its bets on Moscow.

China is ever alert to investment opportunities in Greece, but it appreciates the need for a stable, united eurozone. As for Ireland, Portugal and others which, like Greece, needed emergency financial rescues, none — even Cyprus — has any desire to be bracketed with Athens as a feckless debtor.

What should preoccupy Europe’s leaders and investors is not the parliamentary arithmetic in Athens, or the cuts that the creditors want in the 2015 budget. It is whether Greece has the desire and capacity to continue the arduous modernisation effort begun in 2010 — or whether it will maintain old structures of clientelism, corruption and oligarchy under a façade of obedience to foreign overlords.

quinta-feira, 11 de dezembro de 2014

Japan’s carmakers are gleaming symbols of industrial strength. But there is one area in which they are not so shiny yet: employment practices that squander the potential of Japanese women. Both Toyota and Nissan have no women on their boards; Honda appointed its first only this year.

The picture is repeated across Japanese industry, where women hold only 7 per cent of managerial positions compared with almost 45 per cent in the US.

Female role models in Japanese business are few and far between. One of the few is Mitsuru Claire Chino, an executive officer at Itochu Corporation, a large general trading company. But she is such an unusual case that when she was appointed last year, the mere act of placing a woman in a senior job was enough to make headlines.

Yet Japan needs women in senior positions in business everywhere, as the country seeks to prop up its declining working-age population and boost its faltering economy. Politicians know as much. In the run-up to Sunday’s general election, all the parties have spoken of introducing measures to support young families, so that women can both have families and work full-time.

Yet there is a crucial point no one wants to address: a work culture that favours men.

Bosses (mostly men) expect their staff to work as they did when they were young — which means long hours. It is important to be present to please the boss, whether or not the hours are productive. Even at foreign-owned companies such as mine, junior consultants sometimes stick around to provide moral support while others burn the midnight oil, sacrificing personal time in the cause of “team spirit”.

The typical work culture at Japanese corporations calls for nomi-kai — after-hours sessions drinking and bonding with colleagues. It is less common than it once was for these end up at Tokyo’s kyaba-kura (cabaret clubs), where hostesses sit at the table and grease the conversation. But it still happens, and female colleagues are not welcome.

So what do women do? Well, we put up with it. We are brought up to play nice. We want to please the boss and avoid ruffling feathers. Eventually the pressure of juggling work and family life takes its toll. My best friend works at one of Japan’s largest trading conglomerates. Of a large cohort of female graduates hired 20 years ago, she tells me she is the only one who is still working there.

The few who persevere face another hurdle: male colleagues and bosses who try to “protect” them from excessive workloads. This prevents women being assigned to supposedly tougher projects or sent on business trips. This is not a conscious effort to exclude women from senior roles. I have spoken to highly educated and successful men over 40 who genuinely believe the “fair sex” needs extra care. Their misplaced chivalry deprives female colleagues of opportunities, hurting their prospects when it comes to senior managerial roles. The message to the younger generation is that working seriously and professionally does not pay off.

Can changing the work culture have an impact? There are encouraging glimpses of progress. Legal departments at Japanese corporations generally employ a higher percentage of women — sometimes up to 40 per cent — because here brainpower is all that matters, and face time is less important in a support role. Furthermore, the notion of “protecting” women is less prevalent. Is it a coincidence that Ms Chino, the executive officer at Itochu, hails from the legal department?

It is a start, but Japan needs to replicate this across all its industries. Progress will mean changing the way performance is measured and rewarded. Women themselves, with support from a new generation of men, need to be catalyst for change. Japan must not pay lip service to harnessing the potential of its women.

Nobuko Kobayashi is partner-elect at the Tokyo office of AT Kearney, a consultancy

quarta-feira, 10 de dezembro de 2014

It used to be asked how the US could deploy its soft power in the Middle East more effectively. That was in the days of the Iraq and Afghan wars and President George W Bush’s ill-advised warnings to the world that “you’re either with us or against us”.

There was no easy answer. Many people in the Middle East loved US brands and Hollywood movies, and wanted the American dream. None of that, though, could convince them to accept US foreign policy

Washington tried ever harder to sell what’s good about America. There was a television channel dedicated to Arab audiences, as well as a radio station, a magazine and diplomatic initiatives to promote freedom and democracy, and target youth and women. Nothing worked. No amount of soft power could mitigate harsh American power or counter damage to the US’s image from revelations of torture of al-Qaeda detainees, the full scale of which were detailed in this week’s Senate report on the CIA.

And then a miracle happened. It was Barack Obama. Just by being elected the first black president, he shifted perceptions of America. In the Middle East, it certainly helped that he also called for a new beginning with the Muslim world, based on ending old wars and not starting new ones.

The Obama magic faded quickly, however, and not just among Arabs. This year, it has been damaged further by the National Security Agency spying scandal, further displays of dysfunctional federal government, police shootings and race riots. Not to forget that Mr Obama turned out to be rather uninterested in deploying US might overseas, whether hard or soft.

So it is with some surprise that I find the US tops the 2014 list of Monocle Magazine’s soft power survey. Now in its fifth year, the survey — conducted with a UK think-tank, the Institute for Government — bumped Germany to second place.

Admitting that the winner is “controversial”, the report argues that American soft power today is measured by Silicon Valley more than Washington. With the likes of Google, Apple, Amazon and Netflix, the US tech industry’s influence is indeed both formidable and unprecedented. The fact that Silicon Valley stood up to the White House — as it did in the NSA affair — in the name of personal freedom also accentuates US virtues.

The problem with the survey, however, is what it actually measures. According to Jonathan McClory, who developed the methodology, it is a reflection of the resources available to a given country to deploy its soft power rather than the actual impact. “It’s more an illustration of reality in terms of resources, and perceptions take time to catch up with it,” he says. On that score it is difficult to beat the US. It should win every year.

What’s interesting about such measurements, beyond the fact that they make for a good read, is that the soft power available to one country can be used and abused by others, sometimes to devastating effect.

Take the group that calls itself the Islamic State of Iraq and the Levant (Isis), for example. It has mastered the use of social media to such a degree that it can terrify adversaries into surrendering territory; and persuade Europe’s troubled Muslim youth, including women, that it is building a caliphate utopia. Isis is using the best soft power tools the US offers — Twitter, Facebook, and others — to promote its monstrous behaviour.

Perhaps a more useful reflection of soft power politics can be found in another ranking that doesn’t specifically refer to soft power but measures its influence. The Anholt-GfK Nation Brand index looks at the image of 50 countries as filtered through international public opinion.

There might be problems with this methodology, too, but the results are more convincing. In the latest findings, published in November, Germany knocked the US off the top spot. Germany, argues this survey, not only won football’s World Cup, always a boost on the soft power scale, but has also shown leadership in Europe.

Also pleasing in this survey is that Russia, despite a relentless campaign to advance its soft power, receives the strongest criticism from international public opinion. Until recently it was a fast-rising star. This year, with its support for Ukrainian separatist rebels and annexation of Crimea, it has slid precipitously down the rankings.

terça-feira, 9 de dezembro de 2014

As the price of oil plummets to a five-year low, Saudi Arabia – owner of the world’s largest proven crude reserves – is behaving with almost preternatural calm. So much so that Prince Alwaleed bin Talal Al Saud, the kingdom’s highest-profile investor, a few weeks ago professed himself astonished by official complacency in the face of this “catastrophe” – and that was when the price was still above $90 a barrel.

Now, there are doubtless technical reasons why the Saudis remain sanguine as the price dips well below $70, and the kingdom’s oil technocracy has been prodigal in providing them. This is no different, they say, from any other commodities cycle, in which the market sets prices. The main Saudi concern is to protect market share. If there is any “politics” involved here, analysts add, it is an attempt to force US shale producers with higher production costs out of the market.

It is true, as the Saudis protest, that neither they nor Opec as a whole can set the price. But do they protest too much, as they do nothing to arrest the speed of falling prices? It is not just that the oil producers’ cartel, where Saudi Arabia still rules the roost, declined to cut output at last month’s meeting. As recently as September the Saudis were actually increasing supply to a glutting market.

The Saudis have never abandoned the use of petrodollars for political ends; it is its principal diplomatic weapon. But now they and their Gulf allies appear to be using the oil price itself as a political weapon – aimed principally at Iran.

The practice of hosing socio-political problems with money has been especially visible since the chain of Arab uprisings began four years ago. In early 2011, King Abdullah fired a $130bn welfare broadside at his Saudi subjects. But this traditional model of buying loyalty was quickly exported to neighbouring countries under stress. Within hours of the 2013 Egyptian coup against the Muslim Brotherhood – a rival Pan-Islamic brand – Saudi Arabia and the United Arab Emirates had a $12bn aid package ready for the generals, almost 10 times annual US aid to Egypt’s military.

But the more threatening regional rival to the House of Saud and its absolutist brand of Sunni Islam is Iran – which, since the 2003 US-led Iraq invasion installed a Shia government there, has forged an Arab Shia axis from Baghdad to Beirut, with influence, too, in Saudi neighbours Yemen and Bahrain.

Wahhabi Saudi Arabia’s visceral hatred of the Shia – as well as its rivalry with the Persian and Shia Islamic Republic for hegemony in the Gulf and the Levant – should be factored into the oil price equation. Riyadh, sitting on foreign exchange reserves of more than $750bn, can ride out lower oil revenues. Iran, which needs the price to be twice the current level to make ends meet, is haemorrhaging. Already economically hobbled by sanctions, Tehran is by some estimates spending $1.5bn a month supporting its allies in Syria and Iraq.

Iran, of course, is aligned if not allied with the US and its European and Arab partners, including Saudi Arabia, in the fight against the Islamic State of Iraq and the Levant. And President Barack Obama continues to pursue a rapprochement with Tehran through negotiations over its nuclear ambitions. But the US cannot be in any doubt about Saudi sentiments towards Shia Iran and the idea of a regional thaw. According to a well-placed Arab figure, a senior Saudi official told John Kerry, US secretary of state, while he was talking to Sunni Arab leaders this summer about a coalition against the jihadis: “Isis is our [Sunni] response to your support for the Da’wa” – the Tehran-aligned Shia Islamist ruling party of Iraq.

sexta-feira, 5 de dezembro de 2014

Xi Jinping is shaping up as the most powerful Chinese leader since Mao. Vladimir Putin has invaded one of Russia’s neighbours. In Egypt, Abdel Fattah al-Sisi has eschewed the designation generalissimo in favour of the equally telling field marshal. Turkey’s Recep Tayyip Erdogan occupies a presidential palace to put Louis XIV in the shade. We have been living through the year of the political strongman.

Alongside the authoritarian there are bona fide democrats in the line-up of tough guy leaders who are now making the geopolitical weather. Though properly elected, Mr Erdogan leans towards majoritarianism, but Narendra Modi and Shinzo Abe have shown no inclination to subvert the liberal constitutional order in India and Japan

The connecting thread is rather an approach to interstate relations and an attachment to national sovereignty more rooted in the 19th than in the second half of the 20th century. Some would add Benjamin Netanyahu to such a list. For all their differences, Israel’s prime minister looks more comfortable in the company of Mr Putin than in that of soggy European liberals.

The collapse of Soviet communism was supposed to have ushered in a liberal internationalist order: Russia would prosper as a partner of the west and China would rise as a responsible stakeholder. New powers would understand that rules were a source of mutual advantage. The most optimistic internationalists saw Europe as the template for a postmodern future of multilateralism and pooled sovereignty.

By and large — and all these rough and ready judgments have their exceptions — the strongmen prefer competition over co-operation as the natural order of things; they are nationalists rather than internationalists; and, in the case of China and Russia, they are also unabashedly revisionist.

In most advanced democracies nationalism (as distinct from patriotism) is a term of political abuse. For Mr Xi and Mr Putin, it is at once a way to rally domestic support and an assertion of the primacy of national interests over what the west likes to call universal values. Their commitment to a liberal economic order is likewise constrained: the economy is viewed very much as an instrument of state power.

Europe’s great achievement has been to leave history behind. The strongmen see no reason to apologise for the past. They are busy rewriting school textbooks. History is retold as a way of rekindling past glories and, just as often, of reviving old grievances. Germany has remade itself through contrition. Mr Abe is fed up with saying sorry.

Mr Xi wants to settle scores reaching back to the opium wars. Mr Putin is still in mourning for the collapse of the Soviet Union. Seen through these lenses, the present rules-based order is a creature of the west. Military muscle and balancing alliances are the better currency of international relations.

All this is familiar to students of the great power struggles of the 19th century. It is no accident that officials in Beijing cite the 1823 Monroe doctrine and the build-up of US naval power in the opening years of the 20th century as precedent for China’s present drive for suzerainty over the western Pacific.

Great powers rule their own neighbourhoods, you hear them say. That is how things are done. So Mr Putin’s claim on Russia’s near abroad is mirrored by Mr Xi’s assertive posture in the East and South China Seas.

Mr Putin’s revanchism poses the most immediate challenge. The threat is felt particularly acutely in Europe — and not just because of the facts of geography. Moscow’s annexation of Crimea and its invasion of eastern Ukraine has upturned the founding assumption of the modern European security order: that borders could never again be changed by force. The continent’s postmodernists are now struggling to confront the world as it is rather than the one they imagined it would become.

The US finds it easier to adjust. The American commitment to the liberal order has always been self-consciously self-interested, and Washington has long been ambivalent about international rulemaking. The post-1945 settlement was as much about securing US hegemony as about any altruistic desire to extend peace and prosperity to friends and allies. The US is comfortable with the hard-headed realism that has seen the Obama administration shift its focus from the Atlantic to the Pacific. Russia, in US eyes, is a nuisance; China is the real strategic competitor.

It would be a mistake to see the rise of the strongmen as an unambiguous challenge to the west. There are as many arguments between them. Mr Erdogan may have been all smiles during Mr Putin’s visit this week to Ankara, but Turkey remains an albeit truculent member of Nato. Mr Abe’s ambition to rebuild Japan’s military strength is calculated to deter China. Border disputes with Beijing in the Himalayas have seen Mr Modi look for warmer relations with the US and a partnership with Mr Abe.

What these leaders do tell is that the multilateralist model of the second half of the 20th century is more likely to represent a historical interlude than a permanent shift in the nature of relations between states. Globalisation is already in retreat. As the strong men stride the stage, Kant is making way for Hobbes and multilateralism for great power politics. The west is about to relearn what it is like to live in a much rougher world.